HYCM Market Insights & Trading Tips

What's driving the NZD ahead of the RBNZ

RBNZ Meeting Feb 12 at 01:00GMT

When the RBNZ last met they surprised the markets by keeping a bullish hold at 1.00% vs expectations of a cut to -0.75%. The committee agreed that the general risks to the NZD economy were, 'tilted to the downside and agreed it would add further monetary stimulus if economic developments warranted it'.

So, the RBNZ has been in a data-dependent mode since the November hold. The data has been generally good for the RBNZ since the November rate decision:

• Feb 04: Unemployment rate falls to 4.0% vs 4.2% expected
• Jan 23: Q/Q CPI inflation at 0.5% vs 0.4% expected, 1.9% y/y vs 1.8% y/y (RBNZ's y/y target range is 1-3%)
• Jan 13: NZIER Business confidence -21 (negative, but still lifting from low levels)
• Dec 18: GDP 0.7% vs 0.5% expected

Where now for the RBNZ?

However, the outlook for New Zealand is tempered somewhat by the coronavirus outbreak expected to weigh on GDP figures. Both ANZ and BNZ have cut their growth forecasts for New Zealand's GDP projections. The current expectations are 6% for a rate cut at this Feb 12 meeting and an 'on hold' decision is the current market expectation. Any deviation from this outlook will result in a tradable sentiment shift.



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FX Week Ahead 10.02.20

The global risk tone rapidly improved early this week as the global equity market was helped by ongoing hopes for the development of a coronavirus vaccine. Furthermore, China took decisive action to limit both the outbreak and economic fall-out of the coronavirus, as well as surprising the markets by cutting trade tariffs by up to 50% on $75bln of US goods from February 14. These actions all supported risk assets. As expected we saw outflows from the JPY and CHF and moves into the AUD, NZD, and CAD.

Key events from the past week

• USD: ISM Manufacturing PMI, Monday, Feb 03 The headline reading of 50.9 beat expectations of 48.5. The signing of the phase 1 US-China trade deal has stimulated activity, but the knock-on impact of the coronavirus fears may stunt these signs of growth in the future.
• AUD: Rate decision, Tuesday, Feb 04 The RBA kept rates on hold and was more optimistic than the market anticipated. This resulted in AUD strength along-side the weeks' risk on tones. Governor Lowe stated that the Australian economy is still passing through a ‘gentle turning point’. The question remains how hard the Australian bush fires and coronavirus fallout will hurt the economy going forward.
• USD: ADP Non-Farm Employment, Wednesday, Feb 05 The Dollar Index was strengthened this week on a string of positive US data. The ADP employment and ISM services data out on Wednesdays both exceeded expectations. The expectations for a strong Non-Farm payroll headline figure on Friday is now high.

Key events for the coming week

• NZD: Rate Statement, Wednesday, February 12 The RBNZ surprised markets at its last meeting in 2019 keeping rates on hold at 1.00%. The latest data has been firm for the NZD as CPI data was only one tick below the RBNZ’s inflation target and unemployment fell to 4.0% from 4.2% expected last week.
• USD: Inflation data, Thursday, February 13 The Fed kept rates on hold at their last meeting but said that they would monitor ‘muted inflation’. In the bigger picture, weak inflation reading here would further increase the chances of a Fed rate cut this year and re-stimulate dollar selling.
• Coronavirus: Watch out for the latest virus news. If the market remains reassured around containment of the virus, expect equities and commodities to be bought on pullbacks. Copper futures look particularly good value on a return to a risk-on mood. In the risk-on market, I would expect buyers from $2.550.

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AUDNZD in focus ahead of the RBNZ rate meeting

The expectations are that the RBNZ will stay on hold.

So, with a hold the most likely outcome, the focus will shift on to the forward guidance from the RBNZ. The NZD has been losing value against the AUD over recent days and there is a belief that New Zealand will be hit harder than Australia if/when the coronavirus impact grows. The thinking is that New Zealand is more vulnerable to the virus as trade makes up about 60% of New Zealand's economy compared to around 40% of Australia's economy. Tourism in New Zealand amounts to just under 6% of the economy, while Australia's tourism is around 3%.

So, when the rate statement is released, the market focus will be on the forward guidance. If we get a dovish tilt, remember the BNZ and the ANZ GDP reductions:

However, the outlook for New Zealand is tempered somewhat by the coronavirus outbreak expected to weigh on GDP figures. Both ANZ and BNZ have cut their growth forecasts for New Zealand's GDP projections.

AUDNZD is moving back into the 100 and 200 EMA's on the daily chart with the 1.0530-50 level looking like the first area of overhead resistance, once the 100EMA is cleared. Also, note the R2 resistance level just below the 200EMA.



If there is a dovish shift in the RBNZ forward guidance then looking for buyers on pullbacks on the pair may be a savy trade. Certainly, one to watch.

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RBNZ keeps rates on hold but NZD soars, this is why

The expectations were that the RBNZ would stay on hold. So, when the rate statement was released, it was expected that the market focus would be on the forward guidance. The outlook for New Zealand going into the rate meeting last night had been subdued by the fact that the coronavirus outbreak was expected to weigh on GDP figures. Both ANZ and BNZ have cut their growth forecasts for New Zealand's GDP projections. Remember that New Zealand is more vulnerable to the coronavirus as trade makes up about 60% of New Zealand's economy compared to around 40% of Australia's economy. Furthermore, tourism in New Zealand amounts to just under 6% of the economy, while Australia's tourism is around 3%.

At the meeting the RBNZ kept rates unchanged as expected at 1.00%, noting that policy had time to adjust if needed. The NZD rallied out of the meeting for two reasons:

1. The coronavirus risk was acknowledged and Governor Or said the RBNZ was working on a model of a 6-week disruption. The RBNZ has taken half of the expected Q1 growth off the table in projections due to the coronavirus outbreak. The message to the market was that this was ‘in hand’.
2. The RBNZ adjusted the forecasts for the future rate path now seeing the interest rate at 1.00% in June 2020 and 1.10% in June 2021. This is revising up the previous forecasts of 0.9% through to March 2021.

The NZD was an immediate beneficiary of the RBNZ statement that interest rates now had a future upward path. The positive risk tone with Asian equity markets higher on the session sent the NZDJPY pair through 71.00. As long as this positive risk tone remains, expect NZDJPY buyers on pullbacks today.

If the risk tone alters to risk-off then we will still expect AUDNZD sellers on pullbacks.

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The factors influencing Oil right now

Oil has been on a steady fall recently on demand concerns, but there are a number of factors influencing oil that it is good to be aware of. Here are five of the largest factors, so that you can get a handle on oil in a hurry.

1. The first issue with oil is that the market is, or rather, can be easily oversupplied. OPEC+ has helped keep oil markets price supported through 2019 by agreeing to production cuts.
2. OPEC+ is waiting on Russia to see if they agree to the proposed 600K production cuts. Russia needs US crude to be at around $40 to balance their books, so they are not overly alarmed at current US crude prices around $50. However, Saudi need oil closer to the $80 mark, so they are incentivised to cut production. In fact, production levels for January have been at historic low levels from OPEC suppliers.
3. Libya. The shutdown of ports in the East of Libya has really hit supply. Libya is producing around 180K barrels per day vs a normal production level of 1.2 million barrels per day. So, watch out. The Libyan crisis is currently supporting oil prices, so if the ports suddenly open then oil will fall sharply as they factor in the large inflows.
4. Coronavirus demand issues. The longer and worse the coronavirus outbreak gets, the worse this is for oil prices. China is the world's largest importer of oil at around 11 million barrels per day. The analysis that I have been reading puts China oil demand falling between 1-3 million barrels per day. So, that could be around a 20% fall in Chinese oil demand, possibly slightly more.
5. The IEA and OPEC oil reports are both out this week. It will be interesting to see how they project oil demand being impacted by the coronavirus, so watch out for some potential oil wobbles as those headlines come out.

Check the headlines as they come out so that you can weigh them up against these factors. Trading oil is really like a puzzle at the moment, so just make sure you know how each piece is lining up before making your moves.

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Australia’s triple challenge: Droughts, fires, and viruses

The financial impact

Governor Lowe is optimistic that the Australian economy can bounce back from the drought and the fires. That does hold up as the drop in farm output and consumption should be met by the reconstruction and recovery work that will take place shortly. However, the coronavirus outbreak sits, according to Alexandra Heath (Head of Economic Analysis at the Reserve Bank), in a ‘different league’ to the bushfire shock.

How long will the coronavirus linger?

Heath said that there is a difficulty not knowing how long the disruption will last and the latest economic forecasts only include first-round effects from travel disruptions known at the time. The downside risks to the forecasts, as Heath points out, is that they haven’t really taken into account the fact that China sits in the middle of a lot of supply chains. Heath says that:

‘It’s starting to look a lot like the disruptions and these sort of supply chain spillovers are going to be a lot more serious than what we have’.

Furthermore, The current barring of flights from China into Australia is only going to be a further drag on the education and tourism sector. Remember, tourism is Australia’s second-largest export earner. RBA interest rates are at record lows of 0.75% and factors are lining up for a weak 2020, Australian 10 year bonds are likely to remain bid in this environment and the longer the coronavirus drags on with containment and disruption issues the more it will eat away at Australia’s economy which has around 30% of its GDP from trade with China.

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Watch out for the possibility of another Freaky Friday

Equity markets falling into the weekend

Everyone likes the weekend it seems, apart from the equity markets. They have fallen on 5 of the 6 Fridays in 2020. Take a look at the table below which shows the MSCI All Country World Index and the Friday’s in 2020 circled in red. The only positive day was Friday, January 17:





Today, Friday, the current Asian equity market is mixed with the Hang Seng and Shanghai Comp in positive territory and the Nikkei in the red and S&P500 futures around flat. The obvious reason for the fall in equity markets into the weekend is that the coronavirus might show signs of spreading over the weekend and no-one wants to be long equities and risk a large gap down in price on the open. It’s understandable.

Latest methodology in calculating coronavirus cases confuses markets

So, on February 13, the total number of new cases was just under 15K. That was a massive jump in reported cases due to the way the definitions of infection were changed. From the non-medical background, it was now something like a CT scan showing damage to the lung and fever was now enough to confirm the diagnosis. This spike in reported cases was enough to cause risk on traders to pause. What’s going on here? Is this Chinese underreporting and now they are opening up? Conspiracy theories abound. Chinese health officials have been sacked. Is this malicious or just trying to limit the spread of fear? For us, the most likely explanation is that the coronavirus is more contagious than thought but less deadly than feared. The WHO is certainly not too concerned about the new levels of cases from Hubei. ‘Most of this was down to Hubei using a broader definition to diagnose people’, said Mike Ryan, head of WHO’s health emergencies programme. “This does not represent a significant change in the trajectory of the outbreak,” he said. It is not an easy story to unpick. Is this a global pandemic. Yes, it probably will be. Will it be a ‘severe’ pandemic. Probably not. That’s a tough path to take.

Waiting game

This is now the game in town. Watching and waiting to see whether the cases are dropping or picking up. Today was more of relief with a reduction of new cases to 4823 cases and 116 additional deaths to February’s figures. However, be aware that equity investors may well be taking their cash off the table into the weekend in case there is any change in the spread of the coronavirus. So, watch out for another potential Freaky Friday. I will not be long equity markets into the weekend. Why take the risk?

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FX Week Ahead 17.02.20

The global risk tone has been alternating between risk-on and risk-off this week as the market is undecided about the potential impact of the coronavirus. Midweek there was an adjustment to the way Hubei cases were classified, which led to a large spike in reported cases from the Hubei region. The main issue going forward will be any evidence of supply chains being impacted by China’s considerable efforts to contain the coronavirus. If we start to see evidence these supply chains are being hampered, then expect global equity markets to start falling again.

Key events from the past week

 

1. USD: Inflation data, Thursday, Feb 13. The core CPI reading was 2.3% y/y vs 2.2% expected, but this inflationary uptick should be negated by recent low oil prices. The market is still expecting one Fed rate cut this year even though the Fed’s dot plot is projecting no further rate cuts this year.
2. NZD: Rate Statement, Wednesday, Feb 12. The NZD should continue to find buyers after the RBNZ adjusted its future interest rate path. The RBNZ now sees the interest rate at 1.00% in June 2020 and 1.10% in June 2021. This is revising up the previous forecast of 0.9% through to March 2021.
3. EUR: Industrial Production, Wednesday, Feb 12. The EURUSD fell this week to the lowest level since May 12, 2017. This was partly helped by the reduction in eurozone factory activity with production levels at -2.1% vs -2.0% m/m expected. Expect Euro sellers on pullbacks as expectations rise for future ECB easing.

Key events for the coming week

 

1. CAD: Inflation data, Wednesday, Feb19. Futures markets are pricing in a 60% chance of a Bank of Canada rate cut by April. If oil markets fall further next week CAD will be pressured lower still. Inflation data on Wednesday will be key for the BoC. A weak reading here and expect USDCAD buyers.
2. EUR: Manufacturing and Services PMI’s, Friday, Feb 21. The slowdown in the Eurozone is only set to get worse if the spread of the coronavirus impacts Eurozone manufacturing. Investors will be looking for signs of a further slow-down from Manufacturing and Services PMI data out this Friday.
3. Coronavirus: Watch out for the latest virus news. Keep alert to the latest news on the seriousness of the coronavirus spread. Watch out for supply chain issues being felt from next week onwards. Finally, note that for the past two weeks, Friday has been a strong risk-off day (equity selling, JPY, and CHF strength) heading into the uncertainties of weekend news. Don’t get caught out!

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The Euro to fall to parity: The bleak outlook continues as Euros shorts increase

Euro headed to parity according to Bloomberg

The EURUSD pair currently sits at 1.0835 and so it would need a move of ~8% to move down there.



Reasons for EURUSD parity

The EURUSD pair has been at parity before with the most recent times in 2014 and 2015 and there is plenty of reason to think that could continue again:

 

1. The eurozone economy is weaker than in 2014 and 2015. The slow drag on the eurozone economy is set to remain too with the potential for supply chain disruption from China and Brexit negotiations carrying on in its usual combative and confused state.
2. Bond yields are paying less than in 2014 and 2015.
3. ECB's main interest rates are lower than in 2014 and 2015.
4. The big economies in the eurozone are struggling: German growth stagnated in Q4, French industrial production is falling alongside German industrial production (-2.8% vs -0.3% m/m), and Italy's Central Bank Governor Visco sees risks to the country's economy.

Whereas the US 10 year yield is at 1.58% (around 200bps more than Germany's rate of -40bps) and Fed Chair Powell says the economy is in a 'very good place'. It is perhaps not surprising to see why short EUR positions continue to build for the Euro on the COT report last Friday.

EURUSD sell on rallies

With EURUSD having broken through key support any return back to 1.1000, 1.10500 and 1.1200 look suitable for sellers to re-engage short positions in the medium term.

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Oil markets look vulnerable to coronavirus shock

Oil trying to bounce

The crude complex has tried to bounce as investors generally take the view that the coronavirus will be contained. Looking at US crude below you can see that support was found at the key daily level around $50. However, with Apple issuing a profit warning due to the coronavirus, this is a reminder that there may still be a sting in the tail from the virus fall out that could hit oil.



There had been some expectation last week that Russia would agree to OPEC+ cuts of 600K, but that hope has now faded. Russia needs oil at about $40 a barrel vs Saudi needing oil prices around $80 a barrel to balance their budgets, so Russia will only move on production cuts if they really see the need. Right now, they are happy to ride out the coronavirus, if possible.

Here are two factors that could weigh on oil further if Apple’s move prompts a defensive turn today:

1. Kuwait and Saudi Arabia are due to resume production today from their shared neutral zone fields
2. Libya still has ports closed which have reduced its oil output by around ~1m/b. Production levels are currently around a tenth of normal levels, but if the closed ports re-open then oil will be pressured with the knowledge of the extra supply.

For today, expect sellers on oil retracements, but also watch out for a deeper fall if we start to get more news on the impact of Chinese supply chains being hit.

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Gold looking like it will soon find a top

Safe-haven demand to wane as coronavirus fears subside

The spike in gold yesterday above $1600 is likely to be short-lived. The reason for the spike was concern that Apple's missed revenue warning for Q1 was going to be symptomatic of a wider supply chain issue in China due to the coronavirus outbreak. However, the medium-term outlook for gold is to the downside.

The gold/copper ratio has surged to very high levels that cannot usually be sustained. It looks like creating triple top signaling that risk aversion has now become too extreme. Look at the chart below from the Bloomberg Market's Live Blog which showing the three times the gold/copper ratio has hit similar levels (they are circled):



Furthermore, if you look at the overlay of the OECD leading indicator we see another hint that gold prices may be heading lower. Firstly, what is the OECD leading indicator? Well, here is the definition from the OECD website.

OECD is a composite leading indicator (CLI) designed to provide early signals of turning points in business cycles showing the fluctuation of the economic activity around its long term potential level. CLIs show short-term economic movements in qualitative rather than quantitative terms.

If you look below, you can see that as the OECD turns up, gold turns down. The OECD is the blue line on the chart below, the white line is gold spot prices:



In the big picture, the global economy shows signs of turning around. US and China have agreed on a phase 1 deal and we expect some goodwill towards China after a rough run over the coronavirus outbreak. However, the projections seem to point to the coronavirus being a Q1 blip. With China stepping in to prop up the economy and other central banks around the world willing to do the same then we can only see more downside for gold to come in the medium term.

Technically there is an R1 Pivot Point just above current prices and that may well be the turning point for gold. We are certainly looking out for it as the market focuses back on recovery.



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Why the Yen was weaker yesterday

Via Bloomberg

It was a strange one yesterday. Yes, we had risk on tones with equities green across the board and we were expecting JPY weakness, but it just seemed to keep going and going. The USDJPY put in a strong green candle with gains of around 1.6%.



The reason USDJPY jumped higher

According to Bloomberg's Market Live Blog, there are a number of reasons circulating as to the reason for JPY weakness:

1. Japanese funds buying US dollar debt
2. CTA stopping out
3. Macro funds dumping long JPY/Asia risk hedges

The move occurred during the European Session and trading yesterday felt like a game of two halves with Europe pushing the risk on tone and then the America session pushing it further. We saw steady JPY selling all day. We were looking at the USDJPY. CADJPY and GBPJPY pairs yesterday for longs and they just kept heading north all day. It struck us as steady JPY weakness all day without a sudden move.

Volumes surge

Volumes were nearly double normal volumes yesterday and the volume-weighted average price (VWAP) was 110.55 for the USDJPY. Open interest jumped 19,983 contracts and we have the world and his dog going short yen. For us, the best explanation is that the coronavirus fears are subsiding and a number of larger players are closing long JPY's on coronavirus fears. This makes sense. If anyone has more insight please drop a line in the comments. Either way, check out the action around the VWPA of 110.55 today on USDJPY. Our expectations are for more upside from here as long as the risk tone remains positive and traders sell Yen as coronavirus fears subside.

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What is the gold/silver ratio?

The gold/silver ratio measures the relative strength of gold versus silver prices. It shows how many ounces of silver it takes to purchase one ounce of gold. To get this number, you divide the current gold price by the current silver price. When you have done this you now have the gold/silver ratio. It is a simple way to see which of the two metals is gaining value relative to the other.

The meaning of the ratio

Whenever the gold/silver ratio rises, it means that gold has become more expensive compared to silver. See the gold/silver ratio chart below:



On the other hand, when the ratio falls, it means gold has become less costly relative to silver. See the chart below:



Some analysts, traders, and investors look to "trade the ratio", buying silver when the gold/silver ratio is high and switching to gold when it falls. So, the next time you hear mention of the gold/silver ratio you will now know what the significance is.

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The importance of gauging market sentiment 101

One of the most foundational aspects to grasp is that of sentiment, or put simply, the mood of the market. If you are day trading you must make this a priority to grasp if it is not already under your belt. In fact, if you are struggling with your trading it may be because this concept is new to you.

What is sentiment?

The sentiment is, quite simply, the present mood of the market. The market, like people, has different moods depending on what has just happened. As traders, we are always wanting to know what the current sentiment is.

How to gauge sentiment

The simplest way to gauge market sentiment is to read a good market wrap. You can check out the session wrap on forex websites. Or you can get a paid subscription to one of the large news companies. Some of the basic packages are geared at affordability to retail traders, so try out a few free trials. Having a pre-market open report to read can save you a lot of time trying to piece together yourself what is or is not important from the overnight session.

Use a squawk to gauge sentiment

You may also want to consider buying access to a squawk service as this will let you know how sentiment changes during the day.

How to use sentiment to make trades?

First of all, make sure the sentiment is fresh. The market craves fresh news. Then you simply make sure you do the number one thing. What's the number one thing? It is to pair a weak currency against a strong currency. Then, apply your technicals to that pair you have chosen from a sentiment bias.

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Yen set to fall

Yen weakens regardless of whether the coronavirus outbreak worsens or not. Although yesterday the JPY was operating in its normal function as a safe haven and showed strength through the day, the Yen's safe-haven days may be coming to an end. The reasons are as follows:

1. As global interest rates fall towards zero and beyond the focus on the growth potential of countries is more of a driver than interest rates.
2. A technical recession for Japan looks almost certain and there has been a recent run of poor Japanese data November Japan's business cycle leading indicator hit 2009 levels, Initial 4QGDP estimates came in at -6.3% q/q as private consumption dropped the most since 2014.
3. Corporate bankruptcies increased by 16.1% y/y in January this year, the adjusted merchandise trade balance has been negative for 11 months and machine tool orders have fallen by at least 27% y/y in each of the last 12 months.
4. Yen outflows have been accelerating with the largest purchase of foreign debt since September 2018 by Japanese pension funds.
5. Japan's key auto industry is hit by supply chain issues from the coronavirus impact. Furthermore, 30% of Japan's exports go to China and South Korea, the two worst-affected areas.
6. The coming Tokyo Olympics in July may be badly impacted by the coronavirus outbreak and keep many foreign supporters away.

So, in conclusion, the argument for a weakening Yen is that if the coronavirus impact worsens then gold, silver and US Treasuries will be better safe havens than the Yen. If the coronavirus impacts recede then the growth story will come back into focus and the Yen will weaken again as Japanese growth is weak. So, watch out for this dynamic playing out and don't just assume that the JPY will carry on strengthening.

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S&P500 Futures: To catch a falling knife or grab a bargain?

When can you catch a bounce?

According to a thought-provoking article on Market's Live Blog on the S&P500 futures chart, some buyers might be buying S&P500 futures this AM on the premise that after four big down days then a correction is due.



Coronavirus is getting worse

The spread of the virus is much worse now. We have new cases popping up everywhere and my gut instinct is that this is now definitely going to be a global pandemic. We can't see the Olympics or the Euro's going ahead and we are in for a rough ride. One US CDC official was on the wires saying that it's not a question of 'if', but 'when' it becomes a pandemic. However, markets do not fall in a straight line. For those long term equity investors, we are getting some low levels to load up on longer-term longs. Nice. So, if you have a 10+ year framework, there are nice bargains ahead and set to get cheaper.

When to take a bounce?

The thrust of this post is to ask the question, 'when do you take a bounce from a large fall?' We were looking at the S&P500 yesterday tempted to take a long. We are not now as the market mood is firmly down, but we were at least looking for some kind of reversal from the stochastics to indicate a turning point alongside some softer news. Otherwise, it seems that you would just be trying to catch a knife. So, how about you? What will you need to potentially buy into these large equity falls? Do you have a rule of thumb that you go by?

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Gold set to shine again after pullback

Reasons for Gold's glow

Gold has had a pullback and now we have a base in place on the four-hour chart. Two dips down into the Pivot Point have found buyers each time.



So, technically that is a place to define some near term risk. Targets at recent highs around $1680.

From a fundamental perspective, the Coronavirus now looks uncontainable. Germany gave up trying to trace the infection route of every patient and there are more and more cases of 'community spread' popping up. i.e. people who have no known connection to a risk area. Furthermore, the ability of people to self-quarantine is unrealistic. For some of those working zero contract hours and self -employed contracts the option of taking two weeks off work will just not be there. People will work. Especially if they are asymptomatic.

So, gold will find buyers as more and more equity falls look ahead. It is difficult to predict all the losers from this so risk-off markets look set to stay here now until the cases plateau. Online vaulting service BullionVault, had its busiest day with £17million changing hands and buyers outnumbering sellers two to one, Goldcore, their rival, also had a record number of transactions with stored assets hitting $100million. ETF flows have seen a continued surge in prices as gold is getting more and more attention.

Therefore, expect gold buyers from market and below.

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AUDJPY heading down towards 2009 prices

A double whammy

Our go-to risk pair is the AUDJPY and right now the pressure is on for more AUDJPY downside. The close connection of Australia's economy with China, making up around 30% of Australia's GDP, means that the pair is being hit twice. Firstly, the AUD is weak due to its close connection with China and secondly, the AUD is weak due to a slowing of the global economy. The JPY is strong on the risk-off flows which typically see JPY strength.

So, there is most likely going to be a scary session ahead as fear starts to grip the markets. The contagious nature of the coronavirus is self-evident given how widely the virus has already spread. It will soon get to a stage where the virus can't be easily tracked. So, how far these markets can fall is not yet known, but they almost certainly look like more falls today after a heavy night of losses across the Asia-Pac indices: Nikkei -3.67%, Hang Seng -2.63%, Shanghai Comp -3.71%.
Any retracements in the AUDJPY pair should find sellers and traders could scale into shorts.



Gold longs from yesterday were not behaving as they should with the strong risk-off market, but we saw some selling in gold and silver, so we pulled our gold longs.

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Gold/silver ratio at record highs and silver is set to shine

What is the gold/silver ratio

The gold/silver ratio measures the relative strength of gold versus silver prices. It shows how many ounces of silver it takes to purchase one ounce of gold.
To get this number, you divide the current gold price by the current silver price.
When you have done this you now have the gold/silver ratio. It is a simple way to see which of the two metals is gaining value relative to the other.

The meaning of the ratio

Whenever the gold/silver ratio rises, it means that gold has become more expensive compared to silver. The gold/silver ratio is at a twenty-year high after breaking out of the 94 level.



The ratio hits a 20-year high



Looking at the 20-year ratio you can see how much more expensive gold has become compared to silver. The Fed cut interest rates by 50bps yesterday, so the weak dollar should only cause prices to rise further. If you missed gold, silver is still hanging around the station.



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Rate cut expected by Bank of Canada

Today we have the Bank of Canada’s rate decision and the market expectations are that the BoC will cut rates by 25bps. Prior to yesterday’s surprise rate cut by the Federal Reserve of 50bps the chances of a rate cut where, according to the BAX rate expectations, around 30%. They now stand at 60% with 40% odds of another rate cut for June.

The main question for the rate meeting today at 15:00GMT is whether the BoC cuts by 25 or 50bps. Here is what to expect:

 

1. The biggest sell-off in CAD will come if the BoC cut interest rates by 50bps vs the 25bps expected. In this case, expect AUDCAD buyers at market and pullbacks as long as the risk tone is not negative.
2. If the BoC cuts by 25 bps, but holds back from a 50bps rate cut, then the market will focus on whether the BoC is opening the door to further cuts down the line.
3. If the BoC cuts rates by 25bps, but it is more a ‘one and done’ type of cut this will be hawkish.
4. If the BoC does not cut rates at all then expect CAD strength and look for USDCAD sellers at market and at pullbacks.

Other factors to consider

Don’t forget that CAD is influenced by oil prices. A fall in oil prices will weaken CAD and vice versa, so you will need to keep oil prices in mind which are being influenced by both the risk tone and the OPEC meeting due tomorrow in Vienna.

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